America can’t afford complacency on China

August 17, 2011

In China, as we learned last month, there are Apple Stores and then there are “Apple Stores.” Both sell Apple computers, iPads, cable adaptors, etc. But while Apple’s official beachhead store in Shanghai Pudong attracts mega-sized crowds, about 900 miles west of Shanghai in the city of Chongqing, some entrepreneurial types brazenly knocked off the Apple store concept. Enter one of these stores and you’d find the familiar t-shirt clad friendly geek, the clean (though not as minimalist) Apple aesthetic, and a full stock of real-deal Apple computers. Employees in the store actually believed they were working for Apple and Steve Jobs until press accounts of the knock-off began appearing last month.

This story tells us two things: First, China isn’t yet on the cutting edge of innovation. But second, its imitations are improving and its people are learning fast. In other words, the gap between China and America remains wide, but the narrowing is beginning to gather speed. We won’t wake up tomorrow to discover that China surpassed America to become the world’s leading economy. But there’s a Great Rebalancing underway, one that will fundamentally reorder the relationship that these two economies have with one another and with the world.

For the Chinese leadership, the financial crisis and the resulting market meltdowns in America and Europe underscored the urgency of economic reform. An economy over-reliant on exports to Western consumers is an increasingly bad idea, because when Americans and Europeans stop spending, China starts hemorrhaging millions of jobs. That’s a threat to the country’s baseline social stability.

That’s why China’s latest five-year plan lays out a path toward rebalancing the Chinese economy away from over-reliance on exports and toward greater reliance on Chinese shoppers and their ability to buy more of the products that China makes. It also reflects an attempt by the leadership to reduce its overall political and economic dependency on the US.

It will be difficult for Beijing to accomplish this rebalancing in the short-term—as my colleagues on Eurasia Group’s China Team discuss in a new report. But there is no question that the Chinese government is trying to take real steps in that direction today. For example, on Chinese financial investments into US Treasury bonds, while Beijing won’t undermine its massive investment in the U.S. with any sudden moves to the exits, it is slowly working to redirect its new money elsewhere. China is already increasing its Euro-denominated holdings and investment more in hard commodities around the globe.

Over the longer-term, Beijing will also work to lessen dependence on the US dollar as a reserve currency. This summer’s circus in Washington can only hasten that process.

But US policy makers seem strangely complacent in this process.

Over the past six months, the attention of US policymakers has bounced from one headache to another. Europe’s sovereign debt crisis, the Arab world’s turmoil, NATO’s fight with Muammar Qaddafi, Japan’s triple disaster, a spike in oil prices, and partisan fistfights over the debt ceiling have (mostly) kept China out of the headlines.

US-China relations have also been relatively calm this year, after more serious tensions in 2010.

But it won’t last. And Washington will have to spend more time and energy on putting out fires in the China relationship if it wants to keep relations on an even keel moving forward.

From suspicions of cyber-attacks to censorship to American CEOs publicly airing their frustrations over state-imposed barriers to doing business in China, yesterday’s mutually profitable partnership is fast becoming tomorrow’s emerging rivalry.

Yet, there are still crucial reasons that Washington must limit this damage and search out new opportunities for US-Chinese cooperation. First, China is not about to close its doors on the United States. China will remain a leading source of affordable products, cheap labor, and cheap capital for the foreseeable future.  Third- and fourth-tier cities will open factories and welcome millions of rural migrants like those who descended on the boomtowns of the coast over the past 20 years. This will create consumption “windfalls” that will drive demand for American-made goods in China.

China will also continue to welcome foreign (including American) investment into sectors and regions that Beijing knows must grow—meaning more profit-making opportunities in China for US firms. China will work to gain access to state-of-the-art technology and the managerial and marketing expertise that continues to make Western investment valuable. All of this will create commercial opportunities that America needs.

But there is another reason why America cannot afford for its government to be complacent on China right now. There is also another scenario out there where China’s economic growth projections are scaled back dramatically. A hard landing in China could be generated by a complete failure of the government to pursue its rebalancing goals over the next few years. It could also happen if surging concerns about bad debt in the aftermath of the financial crisis lead to a real banking crisis in the country.

If either comes to pass, and the Chinese government is unable to satisfy its people’s steadily rising expectations for material success, it will become harder to continue to deny its citizens basic civil rights. Modern tools of communication would force state authorities to pour an ever increasing store of resources into managing the free flow of ideas and information through cyberspace. Beijing can cut off the Internet in certain places at certain times, but a lasting blackout would undermine the growth on which China’s success will depend. China can monitor the blogosphere as a means of denying would-be activists an online public square, but they can’t catch every challenge every time. This week’s online public reaction to a high-speed train crash has again reminded authorities that public opinion in China can never again be discounted.

When true political reform finally begins in China, the process will belong to China’s people. But Americans will have a clear and compelling interest in how those changes take shape—and in helping to influence their direction, if only from afar.

This essay is based on a transcribed interview with Bremmer.

Photo: U.S. Vice President Joe Biden (C, bottom) looks on as a Chinese basketball player slam dunks during a U.S.-China friendship basketball match at the Olympics sports center in Beijing August 17, 2011. REUTERS/Ng Han Guan/Pool


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The article is built (like most concerning China nowadays) around a few statements, on which I would like to comment briefly:
1. china exports driven economy, tries rebalancing it will be hard.
China’s reliance on exports is much exaggerated. Net exports is less than 5% GDP. Exports is 25-30% GDP. It is a fact, it is statistics. Export was a tool for faster development in 90s and early 2000s.
2. China vast investor in US bonds and US denominated assets and will slowly diversify from US dollar.
Yes it is a fact but whole world is doing it gradually. The times of US dollar single world reserve currency are mostly gone. The process will take next 10-15 years, but it is inevitable. By QE United States can futher harm future position of USD as the first among equals.
3. Putting out fires in US-China relations.
I would say because internal problems and military overstretch not enough power to put the fires. China is getting stronger fast, much faster then anybody expected so i think it is meaningless and waste of resources.

Posted by Wantunbiasednew | Report as abusive

Impose tariffs on imports from China.

Posted by KyuuAL | Report as abusive

‘…have (mostly) kept China out of the headlines.’

Translation: Clients have stopped asking us for more and more reports about China! We’re losing potential income every month! I’m telling you, the situation is desperate! If this news media dearth of sensationalistic stories, China-bashing, and fearmongering goes on much longer, we may actually end up making LESS of our normal astronomical profits this year than we did last year! Please, please, help us! Publish many, many more dire, foreboding, onimous, menacing, threatening news articles and opinion columns, filled with trepidation, dread, apprehension, consternation, disquiet, nervousness, anxiety and creepy fear! Please believe me; when it costs you almost $500 to write a report you can only sell for a paltry, measly $50,000, you need all the help you can get to make a respectable profit. Don’t let us down, I’m begging you here!

Here’s an example of the kind of thing I mean, that you should be publishing more of, all the time, every day. Thank you very much for your prompt attention to this truly urgent emergency! Lots and lots of dollars are at stake! I might not be able to buy another mansion in Tahiti this year! (Sob, sob, sob)

Posted by FirstAdvisor | Report as abusive

Impose tariffs on imports not only from China but from India, Japan and Russia.

Posted by greenacres | Report as abusive

It tells us that China is still very much an intellectual property pirate from the US. If we weren’t so indebted to them (thanks a lot, George) we might be able to do something about it, like force them to let their currency actually float.

Posted by borisjimbo | Report as abusive

How many US citizens actually concern themselves at the point of purchase as to where (China, India, Japan, Russia) the product was made? You also need to consider where your oil and gas come from and whether you wish that supply route to continue.

You can solve the problem overnight if you choose to.

They would change their arrogant tune in quick time.

Posted by Tommyuk | Report as abusive

Tariffs by all means.

Posted by Intriped | Report as abusive

Reuters had something a few days ago about how every dollar spent on “Made in China” actually puts 55 cents in the pockets of Americans. So think twice before you jump to tariffs are the catch-all solution.

The best solution for everyone is an appreciated RMB. The Chinese consumers get more real wealth and China reduces its ridiculously oversized forex holdings.

Posted by Andao | Report as abusive

I think the importance of the usa as a consumer of chinese goods is being far overblown. The american population is in debt at the city, state and national level. Jobs are gone. Wages are disappearing. Spending is going down further and further. As the american dollar declines and the purchasing power of the american citizen declines there is a simultaneous increase of living conditions and purchasing power of people in India and China itself. You know, where the jobs went. Their 1.2 billion people can easily fill in the purchasing void of a mere 300 million americans…even if they spend half the money. Raw math cannot be argued.

Posted by stambo2001 | Report as abusive

Andeo, an interesting factoid! which citizens get the 55 cents? It wont be the ordinary citizens will it? More like the corps who have a vested interest in China!
Like to see the proof of your figures. As for raw math, the US economy is still by a long way the largest in the world. Unfortunately so is the deficit.

Posted by Tommyuk | Report as abusive

Wantunbiasednew is living in a dreamland. Without all the exports China would GUARANTEED descend into economic chaos and revolution.

China is TOTALLY dependent on exports for their survival.

Posted by 1WorldDone | Report as abusive

1WorldDone, I wish i would but unfortunately that is not the case. There is a common wisdom in my small country “It is better to be invaded by Americans than liberated by Russians”. I wish US would stay for decades as single world superpower or at least dominant military power. US is doing relatively very small harm. So about beliefs and desires.
People usually use ARGUMENTS. Waiting for YOURS…
What i found also interesting in Bremmer’s article:
4. China is technology-hungry and this gives room for US companies to export to China.
Yes, I agree. But if You noticed from outlines of 12th 5y plan China only seeks foreign investment in industries in which it is far behind developed countries. And of course if Americans will not want to share them others: UE, Russia, Japan, Korea would. And again it is only the tool for building domestic capacities.
The problem we all have is sheer size of China market, 1339 million people, 4 times bigger than US, bigger than all developed countries combined. With size come economies of scale. For 1.4 billion consumers it is worth building airplanes, pharma, software, every industry. Just for domestic market. Isolationism for US is not an option. I think in 5-10 years time US would need China consumers more than opposite. Watching back into world economic history, last 2000 years You find empires similar to emerging China: Mongols, Sung&Ming China, British Empire, Roman Empire. BUT in the past economy was not so integrated, technology was not so important, costs of transportation not so small, speed of information much smaller and so on, to leverage the size of EMPIRE. And the most important factor of the empires was so homogenous as present Chinese society: one language, one nation. It is a little scary.
5. Chinese will be angry at the ruling communist party and start revolting.
I don’t agree. Most of society remember how it is to be hungry, can learn from modern history about being opressed by foreign powers,

Posted by Wantunbiasednew | Report as abusive


Posted by loke | Report as abusive

When Palin inevitably becomes President, China will collapse and all the money and wealth that it stole from America IS RETURNING BACK TO THE PALINATION!

Posted by aufman | Report as abusive

Obama is clearly in way over his head on everything. Let’s hope the Chinese don’t move to fast to take advantage of our incompetent weak President, until we can get somebody competent in the White House next year!

Posted by valwayne | Report as abusive